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How Escrow Holdbacks Resolve Title V Issues

 
 

When you sell a home to someone outside your immediate family in Massachusetts, a Title V septic inspection must be done on the property.   If a property fails this inspection, it can stop your transaction in its tracks. Today I want to share how an escrow holdback can help you resolve this issue and get on with your transaction. 

In case you don’t know, the seller must have a septic inspection done before selling their property in our state.  Here is a link to MA guidelines governing Septic Inspections: https://www.mass.gov/guides/buying-or-selling-property-with-a-septic-system#-when-are-system-inspections-required?-.

If their home doesn’t pass inspection, the inspector is required to provide the failed report to the local board of health and the owner. When a house fails this inspection, a buyer’s lender will usually require the septic problem to be resolved before closing. 

If the issue can’t be fixed before closing, the lender can set up an escrow holdback to complete the repair after closing. Typically, in escrow holdback situation 150% of the septic repair’s cost will be held back from the seller’s funds. These funds are typically held in the renovation department’s escrow account or by the closing attorney. 

IMPORTANT:  Before I get into the specific steps of a holdback, remember that the lender will be looking for a copy of the Title V report indicating the reason for the failure, that the system is still functioning, and that the property is still inhabitable.  The inspector needs to indicate this on their report.

Now, let’s get into the steps of a holdback:

  1. Both parties agree to a holdback in writing. This will occur in the sales contract. 
  2. The buyer gets two estimates from non-related contractors. 
  3. The lender submits the purchase contract.
  4. The underwriter approves the holdback.
  5. The buyer selects which contractor they’ll use.
  6. 150% of the repair’s cost is held back until the completion of the repair. This usually comes out of the seller’s funds, but the buyer can pay for it too. 
  7. The repair is completed and approved by a health department official. 
  8. The appraiser will do a final inspection of the property. 
  9. The contractor will sign a lien waiver and provide the final invoice to the lender. 
  10. The buyers sign a release letter saying they’re happy with the completion of the repair. 
  11. The lender will mail a check to the contractor. 

If you know me, you know that I’m a process nut. I’ve created a checklist to help you make sure you’re following every necessary step of this process. Click here to download a PDF!

If you have questions about today’s topic or anything else, please call or email me. I am always willing to help!

All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. CrossCountry Mortgage, LLC (“CrossCountry”) does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by CrossCountry.